Investing Through the Crosscurrents: Growth, Higher Rates

‍

Authored by: Gonzalo Rodriguez Del Valle, CFA, SVP Portfolio Management and Investment Strategy Director

The third quarter of 2026 reminded investors that markets rarely move in a straight line.

Just a few months ago, many believed inflation was on a sustainable path lower and that interest rates would gradually decline. Instead, the quarter brought renewed geopolitical tensions, a sharp rise in energy prices, persistent inflation pressures, and the Federal Reserve's first interest rate hike since 2023. Oil prices moved back above $100 per barrel, inflation expectations rose, and Treasury yields climbed to levels not seen in nearly two decades.

Yet despite these headwinds, the U.S. economy remained remarkably resilient.

Economic growth continued at a healthy pace, employment rebounded after a soft summer, and consumers continued to spend. Corporate America also delivered impressive results, supported by ongoing investment in technology and artificial intelligence, strong profitability, and better-than-expected earnings. GDP growth was revised upward to 2.2% for the second quarter, unemployment remained low at 4.1%, and 86% of S&P 500 companies exceeded earnings expectations.

This divergence between economic strength and growing inflation concerns became the defining theme of the quarter.

The Economy Is Strong, but Inflation Has Not Disappeared

One of the biggest takeaways from Q3 is that inflation remains a significant force in the investment landscape.

While many investors entered the year expecting several Federal Reserve rate cuts, the discussion has shifted in the opposite direction. Inflation remained above the Fed's target, supported by higher energy prices and persistent services inflation. In September, policymakers raised the federal funds rate to 3.75% to 4.00% and signaled that additional tightening remains possible if inflation does not moderate.

For investors, this serves as an important reminder: market expectations can change quickly, and maintaining a long-term perspective is often more valuable than attempting to predict every policy move.

Corporate America Continues to Deliver

Despite higher borrowing costs and increased uncertainty, corporate earnings remain one of the strongest supports for equity markets.

Artificial intelligence investment continues to drive growth across multiple sectors, while strong business spending and healthy corporate profitability have helped offset concerns about higher rates. Analysts now expect S&P 500 earnings growth of nearly 30% for the third quarter, marking another period of exceptionally strong profit expansion.

Importantly, earnings growth is no longer being driven by only a handful of companies. While the largest technology firms remain influential, broader participation across industries has helped strengthen the market's foundation.

That is a healthy development for long-term investors.

Higher Rates Create New Opportunities

The rise in Treasury yields was painful for many fixed-income investors during the quarter, but it also created opportunities that have not been available for years.

The 10-year Treasury yield ended September at 5.29%, its highest level since 2007. Municipal bond yields and investment-grade corporate bond yields also moved significantly higher. While rising rates can pressure existing bond prices, they also increase the income potential available to investors who are deploying new capital.

For investors focused on income generation, today's bond market looks very different than it did just a few years ago.

Looking Ahead to the Fourth Quarter

As we move into the final months of the year, several questions remain at the forefront:

• Will inflation begin to ease again if energy prices stabilize?
• Will the Federal Reserve need to raise rates further?
• Can corporate earnings continue to outpace expectations?
• How will geopolitical developments influence markets and investor sentiment?

The answers will undoubtedly influence short-term market performance. However, history has consistently shown that investors are best served by maintaining discipline rather than reacting to every headline.

Periods of uncertainty are normal. In fact, they are often the price investors pay for long-term returns.

While markets will continue to face risks, the fundamental backdrop remains constructive. Economic growth has persisted, businesses continue to invest, consumers remain active, and corporate earnings have demonstrated impressive resilience. Those factors provide an important foundation as investors navigate the opportunities and challenges ahead.

As always, the most effective investment strategy is one that remains aligned with your long-term goals, risk tolerance, and financial objectives rather than the daily noise of the market.

The Bottom Line

At City National Bank of Florida Wealth Management, we believe periods of uncertainty reinforce the importance of a disciplined, long-term investment approach. Diversification is an important part of that discipline. Spreading investments across different asset classes and sectors keeps a portfolio from depending too heavily on any single market outcome. While inflation, interest rates, corporate earnings, and geopolitical developments will continue to influence markets, successful investing is ultimately about maintaining a well-diversified strategy aligned with your goals and adapting thoughtfully as conditions evolve.

For a deeper look at the economic trends, market performance, and investment themes shaping the markets, view our Q3 2026 Economic & Market Overview.

If you would like to discuss what the current market environment may mean for your portfolio, connect with a City National Bank of Florida Wealth Management Advisor.

‍

^{Investment products are not insured by the FDIC or by any federal government agency. They are not a deposit or other obligation of, or guaranteed by, City National Bank of Florida or any of its affiliates. They are subject to investment risks, including possible loss of the principal amount invested. City National Private does not provide tax or legal advice.}